Same Shampoo, Smaller Bottle: How Americans Will Feel the Pain of Trump’s Trade War
President Donald Trump delivers remarks in support of farmers and ranchers in the Roosevelt Room at the White House May 23, 2019 in Washington, D.C. (Photo by Chip Somodevilla/Getty Images)
American consumers are bearing the weight of the Trump administration’s trade war with China. The question, economists say, is whether or not they’ve noticed yet.
On Sept. 1, a new 15 percent tariff was levied on $112 billion worth of Chinese goods, including popular back-to-school items like clothing, textbooks and pens, as well as everyday items like televisions, shoes, industrial chemicals and cheese. By Dec. 15, another $160 billion of goods, including popular holiday items like video game consoles and iPhones, will also be taxed.
The tariffs are the latest salvo in a trade conflict between the United States and China, which are currently engaged in the largest competitive tariff war since the Great Depression. Negotiators from both countries are set to meet in Washington, D.C., later this month, but have yet to agree on basic terms for relaunching talks.
Starting in summer 2018, the Trump administration imposed tariffs, ranging between 10 and 50 percent, on nearly $300 billion worth of items, about one-third of which are sold directly to consumers. The most recent round of 15 percent tariffs targeted approximately $300 billion of other products, about two-thirds of which are consumer items. (President Trump also recently threatened to hike tariffs on an additional $250 billion of goods from 25 to 30 percent on Oct. 1.)
Meanwhile, Beijing has shot back with tariffs of its own, ranging from 5 to 25 percent, on $110 billion worth of U.S. goods including crude oil, agricultural products and vehicles. It also recently filed a third complaint against the U.S. import duties at the World Trade Organization.
The Sept. 1 and Dec. 15 dates for additional tariffs were chosen to avoid hitting Americans’ pocketbooks, according to Chad Bown, a senior fellow at the Peterson Institute for International Economics and former World Bank lead economist. Tariffs are charged the moment an item lands at an American port, and many of targeted items have likely already arrived, or are soon to arrive — at least for 2019.
A study released this past March, led by a vice president at the Federal Reserve Bank of New York, found the trade war had already hurt the American economy to a tune of an additional $3 billion in taxes and nearly $1.5 billion in lost efficiency. Their findings showed that “the full incidence of the tariff has fallen on domestic consumers so far.”
It’s only a matter of time, though, Bown said, before American consumers start noticing the effects of a trade war on a daily basis.
In an internal report circulated to investors a few weeks ago, J.P. Morgan’s chief U.S. equity strategist Dubravko Lakos-Bujas estimated the annual household cost of the trade war was expected to increase from around $600 to $1,000 after the most recent round of tariffs.
“President Trump all along has said that it’s China that’s paying,” Bown said in an interview with FRONTLINE. “But no, it’s the American consumers that are ultimately going to be paying a big chunk of these tariffs in the form of higher prices.”
“The reality is that the consumer is going to pay more, but it might not be in a bright-line way, where this sweater now costs five dollars more,” said David French, senior vice president of government relations at the National Retail Federation. “It may be something like, that this six-ounce shampoo now has four-and-a-half ounces in it at the same price.”
Retailers don’t like increasing prices, French said, so they may first turn to other techniques to cut corners. As stores and manufacturers scramble to source similar products or ingredients through alternative supply chains, it’s possible quality may start to suffer. They may also have to lay off employees or reduce their hours.
It’s also likely that retailers may spread price increases across other items, as in the case of washing machines. The devices, which were subject to the 2018 tariffs, went up in price by about 12 percent, while prices of dryers — which weren’t taxed — spiked simultaneously.
One growing concern among economists, according to Bown, is that the Trump administration isn’t interested in a deal with China at all — that the fight is simply a way to appear strong at home and abroad. “They haven’t been explicit about what the purpose of all of this is, they haven’t been consistent,” Bown said. “If you make the terms of the deal impossible, maybe the point is that you don’t actually want a deal.”
In all this uncertainty, American retailers are telling French that they are struggling. “If you’re selling certain kinds of apparel, you might have attached the tags, the consumer prices, to the goods when they were manufactured six months ago,” he said. “You can’t replace those tags. You may have to pay a tariff when you bring it in, but where does that tariff end up falling? Does it result in a smaller margin for the retailer? Does it cause other prices to go up for other goods that aren’t subject to the tariff? These are all questions the retailers are wrestling with.”
French, who once worked for Republican Senator Rick Santorum, said he thinks this administration has been struggling with how to use tariffs as a tool in international trade without hurting consumers.
“You can’t change behaviors of supply chains unless somebody in the United States feels the pain,” he said. “These supply chains are located in the United States, these are run by American companies, they serve American consumers. If Americans don’t feel pain, the supply chains don’t react.”
If a deal doesn’t happen soon, French predicted that American shoppers should get used to the trade war and its price, quality and quantity impacts being part of their daily purchasing decisions for a long time. “I think the risk of this being a long-term problem for the U.S. economy and a long-term problem for American consumers is much higher than the stock market is willing to admit.”